SEE Economic Review August

If ever there existed an argument supporting the decoupling of emerging economies from the developed ones, it certainly does not apply to the South-eastern European (SEE) ones. In our mid-year issue of the SEE Quarterly Review, we are downgrading our forecasts for economic growth for all of the economies we cover. In summary, we still expect each of the economies (with the exception of Cyprus and Serbia) to remain in positive territory, but only just and with significant downside risks. Despite different degrees of sensitivity and interconnectedness, the main factor driving our downgrades is the continuing recession and debt crisis in the Euroarea. Weakness and uncertainty in the Euroarea has affected the SEE economies, not only via the trade channel, but it has also curtailed the liquidity and funding of the SEE banking sectors and has been the main culprit responsible for the significant currency depreciation in the area.

As we have mentioned in our previous publications, in an apparent reversal of roles, the Euroarea countries are no longer acting as a paragon of stability and growth for the region. Instead, we estimate that a recession in the Euroarea over the course of the year, coupled with pressure on EU banks deleveraging will be the main factors adversely affecting prospects in the SEE region. As a result, we have downgraded the 2012 Albania annual growth to 1.1% vs. our initial forecast of 2.7% in the January publication, Bulgaria to 0.3% vs. 0.7% and Romania to 0.5% vs. 1.4% where the presence of the IMF will continue to act as an important buffer for macroeconomic and financial stability..

Special attention should be given to two economies in the region. In the case of the Cypriot economy, where we have downgraded our forecast to recession of 2.5% vs. -0.7% initially in January, the EFSF is expected to provide the country with much-needed financial assistance by year-end but the full impact of the imminent MoU with the Troika has not been fully factored-in by the majority of domestic policy makers. Secondly, Serbia appears to be heading down a path of fiscal destabilisation and heighten economic uncertainty. Despite the relapse of the economy in recession (we now expect GDP to shrink by 1.5%) the central bank has been forced to increase interest rates twice already in order to support the currency, while the public finances are also deteriorating faster than we initially anticipated, heading for a 7% fiscal deficit.